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The Trillion-Dollar Smartphone War Has Just Begun

And it will last much longer than you’d think.

There are almost as many mobile phone subscriptions on the planet as there are people. At the end of 2012, the world had 6.7 billion mobile subscriptions, effectively covering 94% of the world's population. Aside from agriculture, no other industry in the history of the world has ever been this far-reaching. Accounting for duplicate SIM cards, there's a whopping 4.3 billion mobile phone users in the world, who own 5.3 billion mobile phones. When I say that smartphones are all the rage, I mean to say that 1.3 billion smartphones only accounts for 25% of all mobile phones. In other words, the growth opportunity for smartphones remains extremely ripe, being that there's potentially trillions of dollars of growth to be had, as smartphones continue toward the path of world dominance.

Death to dumber phones! As smartphone technology continues to advance, previous smartphone technologies are likely to become more cost effective, and should ultimately make its way into the lower end market. Currently, a price threshold of $250 for an unsubsidized smartphone has driven Google(NASDAQ:GOOGL) Android to become the current smartphone leader in terms of market share. At the end of 2012, IDC believed that Android maintained a dominating 68.3% market share. As Google's OEM partners are able to offer more phone for less money, it will put continued pressure on the feature phone market, and drive more eyeballs to Google's ecosystem.

Nokia(NYSE:NOK) may become Android's next victim, since it shipped 79.6 million "dumb" devices last quarter, which declined 15% year over year, and accounted for nearly 65% of Nokia's net device sales. Smartphone shipments saw a 66% decline in volumes, and only made up 32% of the segment's revenue. The result of the smartphone decline is skewed, and can be largely attributed to the recent launch of Microsoft(NASDAQ:MSFT) Windows Phone 8.

Like Google, Microsoft uses the power of its OEM network to drive support and distribution of its freshly-minted Windows Phone 8 ecosystem. Emerging markets remain a key focus for Microsoft, which has reportedly partnered with Qualcomm(NASDAQ:QCOM) to develop a Windows Phone 8 reference design for emerging-market OEMs. Devices based on the design are expected to ship in the latter half of the year.

Premium profitsCompared to emerging-markets, the premium smartphone market where Apple (NASDAQ:AAPL) operates is undoubtedly more saturated. It isn't expected that Apple will necessarily increase its market share between now and 2016, but the smartphone industry is expected to grow by an average of 18.3% each year. Based on this growth rate, if Apple just maintains its current smartphone share, it will have increased its volume by 65% in three years time. The power of compounding can have profound effects on Apple's earnings potential.

Picks and axesDuring the California gold rush of the 1800s, it was those people who sold the picks and axes who made fortunes. In the context of smartphones, chips take the place of picks and axes, making Qualcomm a superb investment idea. Over the long term, Qualcomm will benefit not only from a larger installed base of chips, but also from the royalties its holds for its 3G/4G patent portfolio. Together, this could be a one-two punch in terms of earnings potential. A P/E of 20 doesn't seem all that high for a company with such bright prospects as Qualcomm has.

Can't we all just get along?With such a low saturation of smartphones compared to mobile phones, investors can expect years of great growth ahead for the entire industry. Google will likely continue benefitting by unlocking more value out of its Android platform. Apple is poised to hold its market share until 2016, but the power of compounding should do wonders for its unit growth. Microsoft stands to gain a new user base, and should command more than 11% of the smartphone market by 2016. Nokia is a toss-up, given the shift away from the feature phone and into its smartphone, and it depends if Nokia can successfully navigate the transition. And, Qualcomm should sell a heck of a lot more chips, all while earning more royalties. Perhaps the smartphone industry is the ultimate definition of a megatrend? There seems to be enough of an untapped market for all the players to stretch out and grow.

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